RBI cuts repo rate by 25 basis; leaves CRR unchanged

In a bid to arrest falling growth rates, the Reserve Bank of India (RBI) today cut the repo rates (rates at which it lends to banks) by 25 basis points or 0.25 per cent, while leaving the CRR rate unchanged. The decision was largely in line with expectations from analyst and economist.

"Based on an assessment of the current macroeconomic situation, it has been decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.75 per cent to 7.5 per cent with immediate effect; Consequently, the reverse repo rate under the LAF stands adjusted to 6.5 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 8.5 per cent with immediate effect, " the RBI has stated in a release.

The RBI did not offer any dovish or hawkish indications in its release, though analysts feels that inflation would continue to remain a worry for the central bank.

The year-on-year headline WPI inflation edged up to 6.8 per cent in February 2013 from 6.6 per cent in January, essentially reflecting the upward revisions effected to administered prices of petroleum products. On the other hand, non-food manufactured products inflation, and its momentum, continued to ebb along the trajectory that began in September 2012, enabled by softening prices of metals, textiles and rubber products.

"Worryingly, retail inflation continued on the upward path that set in from October 2012, with the new combined (rural and urban) CPI (Base: 2010=100) inflation at a high of 10.9 per cent in February 2013 on sustained price pressures from food items, especially cereals and proteins. Consequently, the divergence between wholesale and consumer price inflation continued to widen during the year," the RBI stated.

Like the previous policy meeting the RBI did express worry over the rising current account deficit situation. "On the external sector front, the key challenge is to reduce the CAD, which is well above the sustainable threshold. This adjustment, requiring as it does, measures to improve the competitiveness of exports and wean away demand for unproductive imports, will inevitably take time. Meanwhile, financing of the CAD with stable flows remains a challenge," the central bank stated.